Early on in August, it seemed as if the calamity would never end on Wall Street. On the morning of Aug. 10th, the stock market slipped downhill a little more; the Dow Jones industrial average crashed downward two hundred points, in the early morning trades, before it eventually recovered losses later on in the afternoon. And that disturbing event came only a day after Dow plunged down, 387 points. All this, and still the continuous troubling housing market.
Some have speculated, that what the main fear is in all these drops, according to Howard Silverblatt, the senior analyst of Standard & Poor’s, is that, “it’s impossible to tell where you are. We could be right at the bottom just before things head up, or we could be in a free fall.” Others says that investors just need to calm down. Despite the stock market’s recent sell-off, that has caused the nearly nine hundred point drop in Dow, –in under a month’s time, the market still has yet to face the predicted mass correction, which is a widespread, ten percent drop in value. Despite the mass hysteria over the Dow Jones drop, Dow has only actually lost about six percent, and is actually up six percent for this year so far.
Also, regardless over the current worries on the debt created by the subprime market, the majority of corporations are in fairly well enough condition. Markus Schomer, the global economic strategist for AIG Investments, says, “The U.S. corporate sector remains in very good shape.” He has also noted that, for example, the corporate balance sheets are in great condition, and profit margins are close to the highest they’ve been in the last forty years, not to mention a consistently strong cash flow.
Events To Be Cautious Of:
Global Subprime Sell-off
According to some market watchers, one of the things the United States still exports well, are the products of its finances. Early in August, it appeared as though the stock market issues in America were spilled over into international markets as well. In the beginning of August, a few hedge funds managed by BNP Paribas, mainly in France, publicly announced that they will not enable investors, for reasons relating to problems in valuing subprime mortgage-supported securities. Of course, this alerted the already skittish global stock markets, which fall in time with United States equities. The investment strategist for MainStay Investments, Bill Knapp, comments that investors ought to “look for more of these headlines as other holders of these securities acknowledge pricing difficulty and sort through investor requests for asset redemption.”
Volatility Continuing As Investors Determine The Risks They’re Willing To Take
Some market observers has speculated that ever since the bear market ended in October of 2002, investors have been basically placated by the surprisingly unusual, long period of calm within the stock market. However, it appears as though volatility within the stock market is going to be consistent. Earlier on in August, the Chicago Board Options Exhange VIX, or volatility index, went skyward, showing a reading of over 29, which is just about twice as much the reading for the beginning of July of this same year.
Pressure On Federal Reserve Board To Take Action
The central bank has acted already in some ways, although the Fed has not yet lowered the short term interest rates to hold back an impending credit-crunch, as a good portion of investors would like. In mid August, for example, the Fed, gave an injection of about $35 billion in liquidity, in order to help some financial agencies meet their reserve goals or in some cases, requirements. The central bank took another action such as this, in the days that followed up the terrorist attacks on 9/11 in 2001. However, Wall Street is becoming more and more persistent in their pressure on the Fed to begin cutting rates, and fast; the bond market speculates generally that there is a possibility is may occur as soon as September.
Caution For Financial Stocks
Keep a close eye on financial stocks. Many market observers have noted that, almost on a consistent, daily basis a different financial agency is announcing that it has fallen victim to some type of subprime related debt; they’re also getting punished for taking those kinds of risks. For example, Bear Sterns recently announced having issues with three of their hedge funds because of the whole mortgage mess, and has seen their stock drop more than a quarter of their previous value in less than three months. The sector for financial services, unsurprisingly, has been among the areas of the market that have seen the hardest hits, ever since the stock market began to shake a little in mid-July. The financial stocks for S&P 500 began falling significantly since July 19th, down 7.4 percent, and since the beginning of the year have fallen almost ten percent.
The Usual Run For Cover
When things get hectic in the financial world, for example, when the tech bubble popped in the year 2000, or during the currency crisis for Asia, in 1997, investors will start selling off their most risky assets, and then run for the safest assets. The assets that are, and have always been, the best safety for investors –regardless of the minimal yield, are of course United States treasury bonds, which are guaranteed by the government for payoff. The already small yield, less than six percent, has been forced even further downward, to less than five percent, in just a month’s time, by all the investors scurrying to put their funds into safer assets. Unfortunately, what these investors do not realize, is that by pulling their money out of the stock market, as a more immediate consequence, other investors follow along behind them, minimalizing the yield for their bonds. The second side effect for money being pulled back out of the market, is sluggish economy, which can only make the situation within the stock market even worse, and harder to resolve.